Suppose the economy is currently in both short-run and long-run equilibrium at the equilibrium point indicated on the graph as "E1". Also suppose that short-run aggregate supply curve is in the very short run where prices are fixed.
a. Using the infinite line tool , draw both the short run and long run aggregate supply curves that must exist in order for E1 to be the equilibrium. Label these "SRAS" and "LRAS", respectively.
b. Using the 3-pt curve tool , draw an aggregate demand curve that reflects the initial equilibrium. Label it "AD1".
c. Now suppose there is a significant decrease in the velocity of money. Using the copy tool, draw a new aggregate demand curve, labeling it "AD2".
d. Using the double drop line tool, identify the new short-run equilibrium of the economy, labeling it "E2".
e. Using the double drop line tool , identify the new long-run equilibrium in the economy, labeling it "E3".
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